econ test 4

What event led to the creation of the Federal Reserve?

The Bank Panic of 1907, which exposed weaknesses in the U.S. banking system.

When was the Federal Reserve created?

1913, after President Woodrow Wilson signed the Federal Reserve Act.

What was the main goal of the Federal Reserve’s creation?

To stabilize the banking system and prevent future financial crises.

What does the Federal Reserve Act of 1913 do?

Established the Federal Reserve System as the U.S. central bank.

What is the Board of Governors?

The central, independent government agency in Washington D.C. that oversees the entire Federal Reserve System.

How many members serve on the Board of Governors?

Seven members.

Who appoints and confirms members of the Board of Governors?

Appointed by the President of the United States and confirmed by the Senate.

How long is the term for a Board of Governors member?

14 years, and it cannot be renewed.

How long is the term for the Chair and Vice Chair?

4 years, and it can be renewed.

What are the responsibilities of the Board of Governors?

Supervise the 12 Federal Reserve Banks, set reserve requirements, and guide national monetary policy.

How many Federal Reserve Banks are there?

Twelve, each serving a different district across the U.S.

What do the 12 Federal Reserve Banks represent?

The operating arms of the Federal Reserve System.

How many directors serve on each Federal Reserve Bank’s board?

Nine directors.

What is the Beige Book?

A report summarizing economic conditions across each district.

How often is the Beige Book published?

Eight times per year.

What is the FOMC?

The Federal Open Market Committee, which makes key monetary policy decisions such as setting interest rates.

Who serves as Chair of the FOMC?

The Chair of the Board of Governors.

Who are the voting members of the FOMC?

Seven Governors, the New York Fed President, and four rotating Reserve Bank Presidents (12 votes total).

Why is the New York Fed President always a voting member?

Because the New York Fed conducts open market operations.

What is the most frequently used monetary policy tool?

Open Market Operations (buying and selling government securities).

What happens when the Fed buys government securities?

Money supply increases and interest rates fall, stimulating the economy.

What happens when the Fed sells government securities?

Money supply decreases and interest rates rise, slowing inflation.

What is the discount rate?

The interest rate banks pay when borrowing directly from a Federal Reserve Bank.

What are reserve requirements?

The percentage of deposits banks must hold in reserve and not lend out.

How do reserve requirements affect the money supply?

Lower requirements increase the money supply; higher requirements decrease it.

What is paying interest on reserves?

An unconventional policy begun in 2008 where the Fed pays banks interest on reserves to influence lending behavior.

What is the federal funds rate?

The interest rate banks charge each other for overnight loans of reserves.

Why does the Fed target the federal funds rate?

Because it affects borrowing costs across the entire economy and controls overall monetary conditions.

What is Taylor’s Rule used for?

To estimate the target federal funds rate based on inflation and output gaps.

Write Taylor’s Rule.

it = rr + πt + a(πt − π) + b(yt − y).

What does taylors rule represent?

The target federal funds rate.

What does r sub r represent?

The long-run real equilibrium interest rate.

What does π sub t − π* measure?

The inflation gap (difference between actual and target inflation).

What does yt − y* measure?

The output gap (difference between actual and potential GDP).

What does it mean if a > b in Taylor’s Rule?

The Fed is inflation focused (an inflation hawk).

What does it mean if b > a in Taylor’s Rule?

The Fed prioritizes economic growth (a dove).

What does it mean if a = b in Taylor’s Rule?

The Fed gives equal weight to inflation and economic growth.

What is the Fed’s dual mandate?

Stable prices and full employment, representing inflation control and economic growth.